Sunday, December 16, 2012

THE MYSTERIOUS WORLD OF TRADE AND MONEY

Disdain for the Commercial

Not all antipathy to the market order arises from questions of epistemology, methodology, rationality and science. There is a further, darker, dislike. To understand it, we must step behind these relatively rational areas to something more archaic and even arcane: to attitudes and emotions that arise especially powerfully when commercial activity, trade and financial institutions are discussed by socialists - or encountered by primitives.

As we have seen, trade and commerce often depend importantly on confidentiality, as well as on specialised or individual knowledge; and this is even more so of financial institutions. In commercial activities, for example, more is at risk than one's own time and effort, and special information enables individuals to judge their chances, their competitive edge, in particular ventures. Knowledge of special circumstances is only worth striving for if its possession confers some advantage compensating for the cost of acquiring it. If every trader had to make public how and where to obtain better or cheaper wares, so that all his competitors could at once imitate' him, it would hardly be worth his while to engage in the process at all - and the benefits accruing from trade would never arise. Moreover, so much knowledge of particular circumstances is unarticulated, and hardly even articulable (for example, an entrepren- eur's hunch that a new product might be successful) that it would prove impossible to make it `public' quite apart from considerations of motivation.

Of course action in accordance with what is not perceived by all and fully specified in advance - what Ernst Mach called the `observable and tangible' - violates the rationalist requirements discussed earlier. Moreover, what is intangible is also often an object of distrust and even fear. (It may be mentioned in passing that not only socialists fear (if for somewhat different reasons) the circumstances and conditions of trade. Bernard Mandeville `shuddered' when confronted by `the most frightful prospect [which] is left behind when we reflect on the toil and hazard that are undergone abroad, the vast seas we are to go over, the different climates we are to endure, and the several nations we must be obliged to for their assistance' (1715/1924:1, 356). To become aware that we

depend heavily on human efforts that we cannot know about or control is indeed unnerving - to those who engage in them as well as those who would refrain.)

Such distrust and fear have, since antiquity and in many parts of the world, led ordinary people as well as socialist thinkers to regard trade not only as distinct from material production, not only as chaotic and superfluous in itself, not only as a methodological mistake, as it were, but also as suspicious, inferior, dishonest, and contemptible. Through- out history `merchants were objects of very general disdain and moral opprobrium ... a man who bought cheap and sold dear was fundamentally dishonest.... Merchant behaviour violated patterns of mutuality that prevailed within primary groupings' (McNeill, 1981:35). As I recall Eric Hoffer once remarking: `The hostility, in particular of the scribe, towards the merchant is as old as recorded history'.

There are many reasons for such attitudes, and many forms in which they express themselves. Often, in early days, traders were set apart from the rest of the community. Nor was this so only of them. Even some handiworkers, especially blacksmiths, suspected of sorcery by tillers of the soil and herdsmen, were often kept outside the village. After all, did not the smiths, with their `mysteries', transform material substances? But this was so to a far higher degree of traders and merchants, who partook in a network wholly outside the perception and understanding of ordinary people. They engaged in something like the transformation of the non-material in altering the value of goods. How could the power of things to satisfy human needs change without a change in their quantity? The trader or merchant, the one who seemed to effect such changes, standing outside the seen, agreed and understood order of daily affairs, also was thrust outside the established hierarchy of status and respect. So it was that traders were held in contempt even by Plato and Aristotle, citizens of a city which in their day owed her leading position to trade. Later, under feudal conditions, commercial pursuits continued to be held in relatively low esteem, for traders and craftsmen, at least outside a few small towns, then depended for security

of life and limb, as well as of goods, on those who wielded the sword and, with it, protected the roads. Trade could develop only under the protection of a class whose profession was arms, whose members depended on their physical prowess, and who claimed in return high status and a high standard of life. Such attitudes, even when conditions began to change, tended to linger wherever feudalism persisted, or was unopposed by a wealthy bourgeoisie or trading centres in self-governing towns. Thus, even as late as the end of the last century, we are told of

Japan that `the makers of money were almost a class of untouchables'. The ostracism of traders becomes even more understandable when it is remembered that merchant activity is indeed often cloaked in

mystery. `The mysteries of the trades' meant that some gained from knowledge that others lacked, a knowledge the more mysterious in that it often dealt with foreign - and perhaps even disgusting - customs, as well as unknown lands: lands of legend and rumour. `Ex nihilo nihil fit' may no longer be part of science (see Popper, 1977/84:14; and Bartley, 1978:675-76), but it still dominates common sense. Activities that appear to add to available wealth, `out of nothing', without physical creation and by merely rearranging what already exists, stink of sorcery.

A neglected influence reinforcing such prejudices has to do with physical effort,muscular activity, and the `sweat of one's brows'. Physical strength, and the ordinary tools and weapons that often accompany its employment, are not only observable but tangible. There is nothing mysterious about them, even for most people who lack them themselves. The conviction that physical effort, and the capacity for it, are in themselves meritorious and confer rank hardly had to wait for feudal times. It was part of the inherited instinct of the small group, and was preserved among farmers, tillers of the soil, herdsmen, warriors, and even simple householders and handicraftsmen. People could see how the physical effort of the farmer or artisan added to the total of visible useful things - and account for differences of wealth and power in terms of recognisable causes.

Thus physical competition was introduced and appreciated early, as primitive man became familiar, both in competition for leadership and in games of skill (see Appendix E), with ways of testing visible superiority of strength. But as soon as knowledge - which was not `open' or visible - was introduced as an element in competition, knowledge not possessed by other participants, and which must have seemed to many of them also to be beyond the possibility of possession, the familiarity and sense of fairness vanished. Such competition threatened solidarity and the pursuit of agreed purposes. Viewed from the perspective of the extended order, of course, such a reaction must appear quite selfish, or perhaps as a curious kind of group egotism in which the solidarity of the group outweighs the welfare of its individuals.

Such sentiment was still vigorous in the nineteenth century. Thus, when Thomas Carlyle, who had great influence among the literati of the lastcentury,preached that `work alone is noble' (1909:160), he explicitly meant physical, even muscular, effort. To him, as to Karl Marx, labour was the real source of wealth. This particular sentiment may today be waning. Indeed, the connection of productivity with human physical prowess, though still valued by our instincts, plays an ever smaller role in human endeavour, wherein power now less often means physical might as legal right. Of course we can still not do without some very strong individuals, but they are becoming merely one kind of an increasing number of ever smaller groups of specialists. Only among primitives do the physically strong still dominate.

However this may be, activities such as barter and exchange and more elaborate forms of trade, the organisation or direction of activities, and the shifting about of available goods for sale in accordance with profitability, are still not always even regarded as real work. It remains hard for many to accept that quantitative increases of available supplies of physical means of subsistence and enjoyment should depend less on the visible transformation of physical substances into other physical substances than on the shifting about of objects which thereby change their relevant magnitudes and values. That is, the market process deals with material objects, but its shifting around of them does not seem to add (whatever might be claimed or really be so) to their perceptible quantities. The market transmits information about them rather than producing them, and the crucial function played by the conveying of information escapes the notice of persons guided by mechanistic or scientistic habits who take for granted factual information about physical objects and disregard the role played, in the determination of

value, by the relative scarcity of different kinds of objects.

There is an irony here: that precisely those who do not think of economic events in literally materialistic terms - that is, in terms of physical quantities of material substances - but are guided by calculations in terms of value, i.e., by the appreciation that men have for these objects, and particularly those differences between costs and price that are called profits, should habitually be denounced as materialists. Whereas it is precisely the striving for profit that makes it possible for those engaged in it not to think in terms of material quantities of particular concrete needs of known individuals, but of the best way in which they can contribute to an aggregate output that results from the similar separate efforts of countless unknown others.

There is also an error in economics here - an idea that even Carl Menger's brother Anton propagated, the notion that the `whole product of

labour' stems mainly from physical effort; and although this is an old mistake, it is probably John Stuart Mill as much as anyone who is responsible for spreading it. Mill wrote in his Principles of Political Economy (1848, `Of Property', Book II, ch. I, sect. 1; Works, 11:260) that while `the laws and the conditions of the production of wealth partake of the character of physical truths', distribution is `a matter of human institutions only. The things once there, mankind individually or collectively can do with them as

they like', from which he concluded that `society can subject this distribution of wealth to whatever rules it can think out'. Mill, who is here considering the size of the product as a purely technological problem, independent of its distribution, overlooks the dependence of size on the use made of existing opportunities, which is an economic and not a technological problem. We owe it to methods of `distribution', that is, to the determination of prices,

that the product is as large as it is. What there is to share depends on the principle by which production is organised - that is, in a market economy, on pricing and distribution. It is simply wrong to conclude that `the things once there', we are free to do with them as we like, for they will not be there unless individuals have generated price information by securing for themselves certain shares of the total.

There is a further error. Like Marx, Mill treated market values exclusively as effects and not also as causes of human decisions. We shall see later, when

we turn to discuss marginal utility theory explicitly, how inaccurate this is - and how wrong was Mill's declaration that `there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete' (1848:111, I, sect. 1, in Works, 11: 199-200).

Trade - regarded as real work or not - brought not only individual but also collective wealth through effort of brain rather than of muscles. That a mere change of hands should lead to a gain in value to all participants, that it need not mean gain to one at the expense of the others (or what has come to be called exploitation), was and is nonetheless intuitively difficult to grasp. The example of Henry Ford is sometimes brought forward to allay suspicions, to illustrate how striving for profit benefits the masses. The example is indeed illuminating because in it one does easily see how an entrepreneur could directly aim at satisfying an observable need of large numbers of people, and how his efforts did in fact succeed in raising their standard of living. But the example is also insufficient; for in most cases the effects of increases of productivity are too indirect to trace them so plainly. An improvement in, say, the production of metal screws, or string, or window glass, or paper, would spread its benefits so widely that far less concrete perception of causes and effects would remain.

As a consequence of all these circumstances, many people continue to find the mental feats associated with trade easy to discount even when they do not attribute them to sorcery, or see them as depending on trick or fraud or cunning deceit. W ealth so obtained appeared even less related to any visible desert (i.e., desert dependent on physical exertion) than did the luck of the hunter or fisher.

But if wealth generated by such `rearrangements' bewildered folk, the information-searching activities of tradesmen evoked truly great distrust. The transport involved in trade can usually be at least partly understood by the layman, at least after some patient explanation and argument, to be productive. For example, the view that trade only shifts about already existing things can be readily corrected by pointing out that many things can be made only by assembling substances from widely distant places. The relative value of these substances will depend not on the attributes of the individual material components of which they consist but on relative quantities available together at the locations required. Thus trade in raw materials and semi-finished products is a

precondition for increase in the physical quantities of many final products that could only be manufactured at all thanks to the availability of (perhaps small quantities of) materials fetched from far away. The quantity of a particular product that can be produced from resources found at a particular place may depend on the availability of a very much smaller quantity of another substance (such as mercury or phosphor, or perhaps even a catalyst) that can be obtained only at the other end of the earth. Trade thus creates the very possibility of physical production.

The idea that such productivity, and even such bringing together of supplies, also depends on a continuous successful search for widely dispersed and constantly changing information remains harder to grasp, however obvious it may seem to those who have understood the process by which trade creates and guides physical production when steered by information about the relative scarcity of different things at different places.

Perhaps the main force behind the persistent dislike of commercial dealings is then no more than plain ignorance and conceptual difficulty. This is however compounded with preexisting fear of the unfamiliar: a fear of sorcery and the unnatural, and also a fear of knowledge itself harking back to our origins and indelibly memorialised in the first few chapters of the book of Genesis, in the story of man's expulsion from the Garden of Eden. All superstitions, including socialism, feed on such fear.

Marginal Utility versus Macro-economics

The fear may be powerful, but it is unfounded. Such activities are of course notreallyincomprehensible.Economics and the biological sciences, as we have seen in the foregoing chapters, now give a good account of self-organising processes, and we have sketched a partial rational reconstruction of some of their history and beneficial effects in the rise and spread of civilisation in chapters two and three above (see also Hayek, 1973).

Exchange is productive; it does increase the satisfaction of human needs from available resources. Civilisation is so complex - and trade so productive - because the subjective worlds of the individuals living in

the civilised world differ so much. Apparently paradoxically, diversity of individual purposes leads to a greater power to satisfy needs generally than does homogeneity, unanimity and control - and, also paradoxi-

cally, this is so because diversity enables men to master and dispose of more information. Only a clear analysis of the market process can resolve

these apparent paradoxes. An increase of value - crucial in exchange and trade - is indeed

different from increases in quantity observable by our senses. Increase in value is something for which laws governing physical events, at least asunderstoodwithinmaterialist andmechanisticmodels, do not account. Value indicates the potential capacities of an object or action to satisfy human needs, and can be ascertained only by the mutual adjustment through exchange of the respective (marginal) rates of substitution (or equivalence) which different goods or services have for various individuals.Value is not an attribute or physical property possessed by things themselves, irrespective of their relations to men, but solely an aspect of these relations that enables men to take account, in their decisions about the use of such things, of the better opportunities others might have for their use. Increase in value appears only with, and is relevant only with regard to, human purposes. As Carl Menger made clear (1871/1981:121), value `is a judgement economising men make about the importance of goods at their disposal for the maintenance of their lives and well-being'. Economic value expresses changing degrees of the capacity of things to satisfy some of the multiplicity of separate, individual scales of ends.

Each person has his own peculiar order for ranking the ends that he pursues. These individual rankings can be known to few, if any, others, and are hardly known fully even by the person himself. The efforts of millions of individuals in different situations, with different possessions and desires, having access to different information about means, knowing little or nothing about one another's particular needs, and aiming at different scales of ends, are coordinated by means of exchange systems.As individuals reciprocally align with one another, an undesigned system of a higher order of complexity comes into being, and a continuous flow of goods and services is created that, for a remarkably high number of the participating individuals, fulfils their guiding expectations and values.

The multiplicity of different ranks of different ends produces a common, and uniform, scale of intermediate or reflected values of the material means for which these ends compete. Since most material means can be used for many different ends of varying importance, and diverse means can often be substituted for one another, the ultimate values of the ends come to be reflected in a single scale of values of means - i.e., prices - that depends on their relative scarcity and the possibility of exchange among their owners.

Since changing factual circumstances require constant adaptation of particular ends to whose service particular kinds of means must be assigned, the two sets of scales of value are bound to change in different manners and at different rates. The several orders of ranking of individual ultimate ends, while different, will show a certain stability, but the relative values of the means toward whose production those individuals' efforts are directed will be subject to continuous fortuitous fluctuations that cannot be anticipated and whose causes will be unintelligible to most people.

That the hierarchy of ends is relatively stable (reflecting what many may regard as their constant or `lasting' value), whereas the hierarchy of means fluctuates so much, leads many idealistic persons to prize the former and disdain the latter. To serve a constantly changing scale of values may indeed seem repulsive. This is perhaps the fundamental reason why those most concerned about ultimate ends nonetheless often, contrary to their own objectives, attempt to thwart the procedure by which they can best contribute to their realisation. Most people must, to achieve their own ends, pursue what are merely means for themselves as well as for others. That is, they must engage at some point in a long chain of activities which will eventually lead to the satisfaction of an unknown need at some remote time and place, after passing through many intermediate stages directed to different ends.

The label which the market process attaches to the immediate product is all the individual can know in most instances. No person engaged in some stage of the process of making metallic screws, for instance, can possibly rationally determine when, where, or how the particular piece on which he is working will or ought to contribute to the satisfaction of human needs. Nor do statistics help him to decide which of many potential uses to which it (or any other similar item) could be put, should be satisfied, and which not.

But also contributing to the feeling that the scale of values of means, i.e., prices, is common or vulgar, is apparently that it is the same for all, while different scales of ends are distinctive and personal. We prove our individuality by asserting our particular tastes or by showing our more discriminating appreciation of quality. Yet only because of information, through prices, about the relative scarcity of different means are we able to realise as many of our ends as we do.

The apparent conflict between the two kinds of hierarchies of values becomes conspicuous in the extended order, in which most people earn their living by providing means for others unknown to them, and equally obtain the means they require for their own purposes from still others also unknown to them. The only common scales of values thus become those of means, whose importance does not chiefly depend on effects perceived by those who use a particular item but are readily substitutable for one another. Owing to demands for a great variety of ends by a multiplicity of individuals, the concrete uses for which a particular thing is wanted by others (and therefore the value each will put on it) will not be known. This abstract character of the merely instrumental value of means also contributes to the disdain for what is felt to be the `artificial' or `unnatural' character of their value.

Adequate explanations of such puzzling and even alarming phenomena, first discovered scarcely a hundred years ago, were disseminated as the work of William Stanley Jevons, Carl Menger, and Leon Walras was developed, especially by the Austrian school following Menger, into what became known as the `subjective' or `marginal utility' revolution in economic theory. If what has been said in the preceding paragraphs sounds unfamiliar as well as difficult, this suggests that the most elementary and important discoveries of this revolution have even now not reached general awareness. It was the discovery that economic events could not be explained by preceding events acting as determining causes that enabled these revolutionary thinkers to unify economic theory into a coherent system. Although classical economics, or what is often called `classical political economy', had already provided an analysis of the process of competition, and particularly of the manner in which international trade integrated national orders of cooperation into an international one, onlymarginal utility theory brought real understanding of how demand and supply were determined, of how quantities were adapted to needs, and of how measures of scarcity resulting frommutual adjustment guided individuals. The whole market process then became understood as a process of transfer of information enablingmen to use, and put to work, much more information and skill than they would have access to individually.

That the utility of an object or action, usually defined as its capacity to satisfy human wants, is not of the same magnitude to different individuals, now seems so obvious that it is difficult to understand how serious scientists should ever have treated utility as an objective, general and even measurable attribute of physical objects. That the relative utilities of different objects to different persons can be distinguished does not provide the least basis for comparisons of their absolute magnitude.Nor, although people may agree how much they are individually prepared to contribute to the costs of different utilities, does `collective utility' denote a discoverable object: it exists as little as a collective mind, and is at best a metaphor. Nor does the fact that we all occasionally decide that some object is more or less important to another person than to ourselves provide any reason to believe in objective interpersonal comparison of utility.

Indeed, in a certain sense the activity that economics sets out to explain is not about physical phenomena but about people. Economic values are interpretations of physical facts in the light of the degrees of suitability of kinds of physical objects in particular situations for the

satisfaction of needs. Thus one might describe economics (what I now prefer to call catallactics (Hayek, 1973)) as a metatheory, a theory about the theories people have developed to explain how most effectively to

discover and use different means for diverse purposes. Under the circumstances it is not so surprising that physical scientists, on encountering such arguments, often find themselves in strange territory, or that such economists often strike them more like philosophers than `real' scientists.

Marginal utility theory is, although a basic advance, one that has been obscured from the start. The most accessible early statement of the idea in the English-speaking world, by W. S. Jevons, remained after his early death, and also in consequence of the extra-academic position of his single eminent follower,Wicksteed, long disregarded due to the dominant academic authority of Alfred Marshall, who was reluctant to depart from the position of John Stuart Mill. The Austrian co- discoverer of the theory, Carl Menger, was more fortunate in finding at once two highly gifted pupils (Eugen von Bohm-Bawerk and Friedrich von Wieser) to continue his work and to establish a tradition, with the result that modern economic theory gradually came to be generally accepted under the name of the `Austrian School'. By its stress on what it called the `subjective' nature of economic values it produced a new paradigm for explaining structures arising without design from human interaction. Yet, during the last forty years, its contributions have been obscured by the rise of 'macro-economics', which seeks causal connections between hypothetically measurable entities or statistical aggregates. These may sometimes, I concede, indicate some vague probabilities, but they certainly do not explain the processes involved in generating them.

But because of the delusion that macro-economics is both viable and useful (a delusion encouraged by its extensive use of mathematics, whichmust always impress politicians lacking any mathematical education, and which is really the nearest thing to the practice of magic thatoccurs among professional economists)many opinions ruling

contemporary government and politics are still based on naive explanations of such economic phenomena as value and prices, explanations that vainly endeavour to account for them as `objective' occurrences independent of human knowledge and aims. Such explan- ations cannot interpret the function or appreciate the indispensability of trading and markets for coordinating the productive efforts of large numbers of people.

Some habits that have crept into mathematical analysis of the market process often mislead even trained economists. For example, the practice of referring to `the existing state of knowledge', and to information available to acting members of a market process either as `data' or as `given' (or even by the pleonasm of `given data'), often leads economists to assume that this knowledge exists not merely in dispersed form but that the whole of it might be available to some single mind. This conceals the character of competition as a discovery procedure. What in these treatments of the market order is represented as a `problem' to be solved is not really a problem to anyone in the market, since the determining factual circumstances on which the market in such an order depends cannot be known to anyone, and the problem is not how to use given knowledge available as a whole, but how to make it possible that knowledge which is not, and cannot be, made available to any one mind, can yet be used, in its fragmentary and dispersed form, by many interacting individuals - a problem not for the actors but for the theoreticians trying to explain those actions.

The creation of wealth is not simply a physical process and cannot be explained by a chain of cause and effect. It is determined not by objective physical facts known to any one mind but by the separate, differing, information of millions, which is precipitated in prices that serve to guide further decisions. When the market tells an individual entrepreneur that more profit is to be gained in a particular way, he can both serve his own advantage and also make a larger contribution to the aggregate (in terms of the same units of calculation that most others use) than he could produce in any other available way. For these prices inform market participants of crucial momentary conditions on which the whole division of labour depends: the actual rate of convertibility

(or `substitutability') of different resources for one another, whether as means to produce other goods or to satisfy particular human needs. For this it is even irrelevant what quantities are available to mankind as a whole.Such 'macro-economic' knowledge of aggregate quantities available of different things is neither available nor needed, nor would it even be useful. Any idea of measuring the aggregate product composed of a great variety of commodities in varying combinations is mistaken: their equivalence for human purposes depends on human knowledge, and only after we have translated physical quantities into economic values can we begin to estimate such matters.

What is decisive for the magnitude of the product, and the chief determinant generating particular quantities, is how those millions of individuals who have distinctive knowledge of particular resources combine them at various places and times into assemblies, choosing among the great varieties of possibilities - none of which possibilities can by itself be called the most effective without knowing the relative scarcity of different elements as indicated by their prices.

The decisive step towards understanding the role of relative prices in determining the best use of resources was Ricardo's discovery of the principle of comparative costs, of which Ludwig von Mises rightly said that it ought to be called the Ricardian Law of Association (1949:159-64). Price relations alone tell the entrepreneur where return sufficiently exceeds costs to make it profitable to devote limited capital to a particular undertaking. Such signs direct him to an invisible goal, the satisfaction of the distant unknown consumer of the final product.

The Intellectuals' Economic Ignorance

An understanding of trade and of marginal-utility explanations of the determination of relative values is crucial for comprehending the order on which the nourishment of the existing multitudes of human beings depends. Such matters ought to be familiar to every educated person. Such understanding has been thwarted by the general disdain with which intellectuals tend to treat the entire subject. For the fact made clear by marginal utility theory - namely, that it could become every individual's distinct task, by his several knowledge and skills, to help satisfy the needs of the community through a contribution of his choice - is equally foreign to the primitive mind and to the reigning constructivism, as well as to explicit socialism.

It is no exaggeration to say that this notion marks the emancipation of the individual. To the development of the individualist spirit are due (see chapters two and three above) the division of skills, knowledge and labour on which advanced civilisation rests. As contemporary economic historians like Braudel (1981-84) have begun to comprehend, the disdainedmiddleman, striving for gain, made possible the modern extended order, modern technology, and the magnitude of our current population. The ability, no less than the freedom, to be guided by one's own knowledge and decisions, rather than being carried away by the spirit of the group, are developments of the intellect which our emotions have followed only imperfectly. Here again, although members of a primitive group may readily concede superior knowledge to a revered leader, they resent it in the fellow who knows a way to obtain by little perceptible effort what others can get only by hard work. To conceal and to use superior information for individual or private gain is still regarded as somehow improper - or at least unneighbourly. And these primitive reactions remain active long after specialization has become the only way to make use of the acquisition of information in its great variety. Such reactions also continue today to influence political opinion and

action, to thwart the development of the most effective organisation of production, and to encourage the false hopes of socialism. That mankind - which owes the supplies on which it lives as much to trade as to production - should despise the first but overly esteem the second creates a state of affairs that cannot help but have a distorting effect on political attitudes.

Ignorance of the function of trade, which led initially to fear, and in the Middle Ages to uninformed regulation, and which only compar- atively recently yielded to better understanding, has, then, now been revived in a new pseudo-scientific form. In this form it lends itself to attempts at technocratic economic manipulation which, when they inevitably fail, encourage a modern form of distrust of `capitalism'. Yet the situation may seem worse still when we turn our attention to certain further ordering processes, even harder to understand than is trade, i.e., those governing money and finance.

The Distrust of Money and Finance

Prejudice arising from the distrust of the mysterious reaches an even higher pitch when directed at those most abstract institutions of an advanced civilisation on which trade depends, which mediate the most general, indirect, remote and unperceived effects of individual action, and which, though indispensable for the formation of an extended order, tend to veil their guiding mechanisms from probing observation: money and the financial institutions based on it. The moment that barter is replaced by indirect exchange mediated by money, ready intelligibility ceases and abstract interpersonal processes begin that far transcend even the most enlightened individual perception.

Money, the very `coin' of ordinary interaction, is hence of all things the least understood and - perhaps with sex - the object of greatest unreasoning fantasy; and like sex it simultaneously fascinates, puzzles and repels. The literature treating it is probably greater than that devoted to any other single subject; and browsing through it inclines one to sympathise with the writer who long ago declared that no other subject, not even love, has driven more men to madness. `The love of money', the Bible declares, `is the root of all evil' (I Timothy, 6:10). But ambivalence about it is perhaps even more common: money appears as at once the most powerful instrument of freedom and the most sinister tool of oppression. This most widely-accepted medium of exchange conjures up all the unease that people feel towards a process they cannot understand, that they both love and hate, and some of whose effects they desire passionately while detesting others that are inseparable from the first.

The operation of the money and credit structure has, however, with language and morals, been one of the spontaneous orders most resistant to efforts at adequate theoretical explanation, and it remains the object of serious disagreement among specialists. Even some professional students have resigned themselves to the insight that the particulars necessarily escape perception, and that the complexity of the whole compels one to be content with accounts of abstract patterns that form themselves spontaneously, accounts which, however enlightening, give no power to predict any particular result.

Money and finance trouble not only the student. Like trade and for many of the same reasons, they remain unremittingly suspect to moralists. The moralist has several reasons for distrusting this universal means of obtaining and manipulating power over the greatest variety of ends in the least visible manner. First, whereas one could readily see how many other objects of wealth were used, the concrete or particular effects of the use of money on oneself or on other people often remain indiscernible. Second, even when some of its effects are discernible, it may be used for good and bad ends alike - hence the supreme versatility that makes it so useful to its possessor also makes it the more suspect to the moralist. Finally, its skilful use, and the large gains and magnitudes arising from it, appear, as with commerce, divorced from physical effort or recognisable merit, and need not even be concerned with any material substrate - as in `purely paper transactions'. If craftsmen and blacksmiths were feared for transforming material substance, if traders were feared for transforming such intangible qualities as value, how much more will the banker be feared for the transformations he effects with the most abstract and immaterial of all economic institutions? Thus we reach the climax of the progressive replacement of the perceivable and concrete by abstract concepts shaping rules guiding activity: money and its institutions seem to lie beyond the boundary of laudable and understandable physical efforts of creation, in a realm where the comprehension of the concrete ceases and incomprehensible abstractions rule.

Thus the subject at once bewilders specialists and offends moralists: both are alarmed to find that the whole has outgrown our capacity to survey or control the sequence of events on which we depend. It seems all to have got out of hand, or as the German expression more tellingly puts it, ist uns uber den Kopf gewachsen. No wonder the expressions that refer to money are so emphatic, even hyperbolic. Perhaps some still believe, as Cicero (De officiis, 11:89) tells us of the elder Cato, that money-lending is as bad as murder. Although the Roman followers of the Stoics, such as Cicero himself and Seneca, did show more understanding of such matters, current views about market-determined rates of interest on loans are hardly more flattering, even though the latter are so important in directing capital to its most productive uses. Thus we still hear of the `cash nexus', `filthy lucre', `the acquisitive instinct', and the activities of the `huckster' (for an account of all this see Braudel, 1982b).

Nor do the problems end with the expression of rude epithets. Like morality, law, language, and biological organisms, monetary institu- tions result from spontaneous order - and are similarly susceptible to variation and selection. Yet monetary institutions turn out to be the least satisfactorily developed of all spontaneously grown formations. Few will, for example, dare to claim that their functioning has improved during the last seventy years or so, since what had been an essentially automatic mechanism based on an international metallic standard was replaced, under the guidance of experts, by deliberate national `monetary policies'. Indeed, humankind's experiences with money have given good reason for distrusting it, but not for the reasons commonly supposed. Rather, the selective processes are interfered with here more than anywhere else: selection by evolution is prevented by government monopolies that make competitive experimentation impossible.

Under government patronage the monetary system has grown to great complexity, but so little private experimentation and selection among alternative means has ever been permitted that we still do not quite know what good money would be - or how good it could be. Nor is such interference and monopoly a recent creation: it occurred almost as soon as coinage was adopted as a generally accepted medium of exchange. Though an indispensable requirement for the functioning of an extensive order of cooperation of free people, money has almost from its first appearance been so shamelessly abused by governments that it has become the prime source of disturbance of all self-ordering processes in the extended order of human cooperation. The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception. In this respect, governments have proved far more immoral than any private agency supplying distinct kinds of money in competition possibly could have been. I have suggested elsewhere, and will not argue again here, that themarket economy might well be better able to develop its potentialities if government monopoly of money were abolished (Hayek, 1976/78, and 1986:8-10). However this may be, our main subject here, the persistent adverse opinion of `pecuniary considerations', is based on ignorance of the indispensable role money plays in making possible the extended order of human cooperation and general calculation in market values. Money is indispensable for extending reciprocal cooperation beyond the limits of human awareness - and therefore also beyond the limits of what was explicable and could be readily recognized as expanding opportunities.

The Condemnation of Profit and the Contempt for Trade

The objections of the beaux esprits of our own time - those intellectuals we have just mentioned again, and with whom we were concerned in earlier chapters - do not differ so very much from the objections of members of primitive groups; and it is this that has inclined me to call their demands and longings atavistic.What intellectuals steeped in constructivist presuppositions findmost objectionable in the market order, in trade, in money and the institutions of finance, is that producers, traders, and financiers are not concerned with concrete needs of known people but with abstract calculation of costs and profit. But they forget, or have not learned, the arguments that we have just rehearsed. Concern for profit is just what makes possible the more effective use of resources. It makes the most productive use of the

variety of potential support that can be enlisted from other business undertakings. The high-minded socialist slogan, `Production for use, not for profit', which we find in one form or another from Aristotle to Bertrand Russell, from Albert Einstein to Archbishop Camara of Brazil ,(and often, since Aristotle, with the addition that these profits are made at the expense of others'), betrays ignorance of how productive capacity is multiplied by different individuals obtaining access to different knowledge whose total exceeds what any single one of them could muster. The entrepreneur must in his activities probe beyond known uses and ends if he is to provide means for producing yet other means which in turn serve still others, and so on - that is, if he is to serve a multiplicity of ultimate ends. Prices and profit are all that most producers need to be able to serve more effectively the needs of men they do not know. They are a tool for searching -just as, for the soldier or hunter, the seaman or air pilot, the telescope extends the range of vision. The market process gives most people the material and information resources that they need in order to obtain what they want. Hence few things are more irresponsible than the derision of concern with costs by intellectuals who, commonly, do not know how to go about finding out how particular results are to be achieved at the least sacrifice of other ends. These intellectuals are blinded by indignation about that essential chance of very large gains that seem disproportionate to the effort required in a particular case, but that alone makes this kind of experimentation practicable.

It is hence hard to believe that anyone accurately informed about the market can honestly condemn the search for profit. The disdain of profit is due to ignorance, and to an attitude that we may if we wish admire in the ascetic who has chosen to be content with a small share of the riches of this world, but which, when actualised in the form of restrictions on profits of others, is selfish to the extent that it imposes asceticism, and indeed deprivations of all sorts, on others.